I've seen it happen first hand. I had some stock in a company that was running out of money and having issues raising their next round. They ended up taking a d

I've seen it happen first hand. I had some stock in a company that was running out of money and having issues raising their next round. They ended up taking a deal with an investor that took a huge ownership stake and diluted the company significantly. To entice the founders not to bail they carved out some additional stock for them, but everyone else got hit by the full dilution. Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.